Societe Generale Warns of Overdone Fixed Income Selloff

Societe Generale strategists have expressed concerns that the recent selloff in global fixed income has gone too far, particularly in Western Europe where yields on 2-year and 10-year bonds have risen by around 30 basis points over the past four weeks. According to their analysis, this rise is priced in for a second European Central Bank (ECB) hike in September, but they view a third move to 2.75% by February as a stretch unless Eurozone growth and second-round inflation effects strengthen materially.

The strategists argue that the current fixed income selloff appears overdone, with potential for a short covering squeeze and mean-reversion in yields into month-end. They point out that technically, the picture looks sombre across main developed economies, but nowhere more so than in Western Europe where 2-year and 10-year yields have increased.

While a third increase by next February is discounted, the strategists warn that this could be a stretch unless the economy picks up pace and second-round inflation effects crystallise. This would put policy in restrictive territory by around 50 basis points, adding to the appeal of EUR/USD if the Fed does not tighten and oil prices decrease.